Entry into Winner-Take-All and Proportional-Prize Contests: An Experimental Study

This experiment compares the performance of two contest designs: a standard winnertake- all tournament with a single fixed prize, and a novel proportional-payment design in which that same prize is divided among contestants by their share of total achievement. We find that proportional prizes elicit more entry and more total achievement than the winner-take-all tournament. The proportional-prize contest performs better by limiting the degree to which heterogeneity among contestants discourages weaker entrants, without altering the performance of stronger entrants. These findings could inform the design of contests for technological and other improvements, which are widely used by governments and philanthropic donors to elicit more effort on targeted economic and technological development activities.performance pay, tournament, piece rate, tournament design, contest, experiments, risk aversion, feedback, gender

Behavioral Mechanism Design: Optimal Contests for Simple Agents

Incentives are more likely to elicit desired outcomes when they are designed based on accurate models of agents' strategic behavior. A growing literature, however, suggests that people do not quite behave like standard economic agents in a variety of environments, both online and offline. What consequences might such differences have for the optimal design of mechanisms in these environments? In this paper, we explore this question in the context of optimal contest design for simple agents---agents who strategically reason about whether or not to participate in a system, but not about the input they provide to it. Specifically, consider a contest where $n$ potential contestants with types $(q_i,c_i)$ each choose between participating and producing a submission of quality $q_i$ at cost $c_i$, versus not participating at all, to maximize their utilities. How should a principal distribute a total prize $V$ amongst the $n$ ranks to maximize some increasing function of the qualities of elicited submissions in a contest with such simple agents? We first solve the optimal contest design problem for settings with homogenous participation costs $c_i = c$. Here, the optimal contest is always a simple contest, awarding equal prizes to the top $j^*$ contestants for a suitable choice of $j^*$. (In comparable models with strategic effort choices, the optimal contest is either a winner-take-all contest or awards possibly unequal prizes, depending on the curvature of agents' effort cost functions.) We next address the general case with heterogeneous costs where agents' types are inherently two-dimensional, significantly complicating equilibrium analysis. Our main result here is that the winner-take-all contest is a 3-approximation of the optimal contest when the principal's objective is to maximize the quality of the best elicited contribution.Comment: This is the full version of a paper in the ACM Conference on Economics and Computation (ACM-EC), 201

Market Design, Human Behavior, and Management

We review past research and discuss future directions on how the vibrant research areas of market design and behavioral economics have influenced and will continue to impact the science and practice of management in both the private and public sectors. Using examples from various auction markets, reputation and feedback systems in online markets, matching markets in education, and labor markets, we demonstrate that combining market design theory, behavioral insights, and experimental methods can lead to fruitful implementation of superior market designs in practice

Relative Performance Pay in the Shadow of Crisis

We analyze whether incentives from relative performance pay are reduced or enhanced if a department is possibly terminated due to a crisis. Our benchmark model shows that incentives decrease in a severe crisis, but are boosted given a minor crisis since efforts are strategic complements in the former case but strategic substitutes in the latter one. We tested our predictions in a laboratory experiment. The results confirm the effort ranking but show that in a severe crisis individuals deviate from equilibrium significantly stronger than in other situations. This behavior contradicts the benchmark model and leads to a five times higher survival probability of the department. We develop a new theoretical approach that may explain players’ behavior

Selective Intervention and Internal HybridsInterpreting and Learning from the Rise and Decline of the Oticon Spaghetti Organization

Infusing hierarchies with elements of market control has become a much-used way of simultaneously increasing entrepreneurialism and motivation in firms. However, this paper argues that such “internal hybrids,” particularly in their radical forms, are inherently hard to successfully design and implement, because of fundamental credibility problems related to managerial promises to not intervene in delegated decision-making ¾ an incentive problem that is often referred to as the “problem of selective intervention.” This theoretical theme is developed and illustrated, using the case of the world-leading Danish hearing aids producer, Oticon. In the beginning of the 1990s, Oticon became famous for its radical internal hybrid, the ”spaghetti organization.” Recent work has interpreted the spaghetti organization as a radical attempt to foster dynamic capabilities by imposing loose coupling on the organization, neglecting, however, that about a decade later, the spaghetti organization has given way to a more traditional matrix organization. This paper presents an organizational economics interpretation of organizational changes in Oticon, and argues that a strong liability of the spaghetti organization was the above incentive problem. Motivation in Oticon was strongly harmed by selective intervention on the part of top-management Changing the organizational structure was one means of repairing these motivational problems. Refutable implications are developed, both for the understanding of efficient design of internal hybrids, and for the more general issue of the distinction between firms and markets, as well as the choice between internal and external hybrids.Internal hybrids, organizational change, delegation, managerial commitment problems, new organizational forms

Field Evidence on Individual Behavior & Performance in Rank-Order Tournaments

Economic analysis of rank-order tournaments has shown that intensified competition leads to declining performance. Empirical research demonstrates that individuals in tournament-type contests perform less well on average in the presence of larger number of competitors in total and superstars. Particularly in field settings, studies often lack direct evidence about the underlying mechanisms, such as the amount of effort, that might account for these results. Here we exploit a novel dataset on algorithmic programming contests that contains data on individual effort, risk taking, and cognitive errors that may underlie tournament performance outcomes. We find that competitors on average react negatively to an increase in the total number of competitors, and react more negatively to an increase in the number of superstars than non-superstars. We also find that the most negative reactions come from a particular subgroup of competitors: those that are highly skilled, but whose abilities put them near to the top of the ability distribution. For these competitors, we find no evidence that the decline in performance outcomes stems from reduced effort or increased risk taking. Instead, errors in logic lead to a decline in performance, which suggests a cognitive explanation for the negative response to increased competition. We also find that a small group of competitors, who are at the very top of the ability distribution (non-superstars), react positively to increased competition from superstars. For them, we find some evidence of increased effort and no increase in errors of logic, consistent with both economic and psychological explanations

Co-opetition models for governing professional football

In recent years, models for co-creating value in a business-to-business context have often been examined with the aim of studying the strategies implemented by and among organisations for competitive and co-operative purposes. The traditional concepts of competition and co-operation between businesses have now evolved, both in terms of the sector in which the businesses operate and in terms of the type of goods they produce. Many researchers have, in recent times, investigated the determinants that can influence the way in which the model of co-opetition can be applied to the football world. Research interest lies in the particular features of what makes a good football. In this paper, the aim is to conduct an analysis of the rules governing the “football system”, while also looking at the determinants of the demand function within football entertainment. This entails applying to football match management the co-opetition model, a recognised model that combines competition and co-operation with the view of creating and distributing value. It can, therefore, be said that, for a spectator, watching sport is an experience of high suspense, and this suspense, in turn, depends upon the degree of uncertainty in the outcome. It follows that the rules ensuring that both these elements can be satisfied are a fertile ground for co-operation between clubs, as it is in the interest of all stakeholders to offer increasingly more attractive football, in comparison with other competing products. Our end purpose is to understand how co-opetition can be achieved within professional football

Contests for experimentation

We study contests for innovation with learning about the innovation’s feasibility and opponents’ outcomes. We characterize contests that maximize innovation when the designer chooses a prize-sharing scheme and a disclosure policy. A “public winnertakes-all contest” dominates public contests—where any success is immediately disclosed—with any other prize-sharing scheme as well as winner-takes-all contests with any other disclosure policy. Yet, jointly modifying prize sharing and disclosure can increase innovation. In a broad class of mechanisms, it is optimal to share the prize with disclosure following a certain number of successes; under simple conditions, a “hidden equal-sharing” contest is optimal

The effect of prize structure and feedback policy on employee effort: a tournament theory approach

One of the main focus of management is on ways to motivate employees to improve their performance, initially at the level of individuals, and ultimately at the level of the organization (Denisi & Pritchard, 2006). So, it is critical to set effective performance appraisal systems to stimulate employees’ efforts. Since tournament theory arose out of the labor economics literature (Lazear & Rosen, 1981), it has expanded to a wide range of other disciplines including management. Most of the previous studies on prize structure using this theory have focused on a two-level prize while, in real life, practitioners always adopt a multiple level prize structure. In addition, previous studies on feedback in a dynamic tournament have unveiled agents’ reactions, however, there are few studies on feedback in multiple agents’ tournaments with multiple level prize structure. These two gaps between theory and practice have motivated the research in this thesis. Based on tournament theory, we study the effect of prize structure and feedback policy on employee efforts in a multi-person tournament. The experimental method is used to compare the efforts in four situations, including two-level prize structure with full feedback policy, multiple level prize structure with full feedback, two-level prize structure with no feedback, and multiple level prize structure with no feedback. After the experiment, six participants were invited to join a focus group interview for further insights on the experiment. As a supplement, a single case study of a factory in China is conducted and data collected through document analysis and a questionnaire distributed to employees. The results show that the subjects’ efforts in a multiple level prize structure is higher than that in a two-level prize structure in a multi-person tournament. Under both the policy of full feedback of own and relative performance information, and under no feedback policy, the effort in multiple level prize is also higher than that in two-level prize. These findings may contribute to develop the tournament theory in terms of prize structure in a multi-person tournament, and to bridge the gap between academia and industry since results could guide practitioners in the industry to apply a multiple level prize structure into employee performance management systems in order to maximize employee’s efforts and the overall output.A melhoria do desempenho dos trabalhadores é uma das principais preocupações da gestão quer a nível individual quer organizacional (Denisi & Pritchard, 2006), pelo que é necessário conceber sistemas de avaliação que promovam o esforço desenvolvido. A teoria dos torneios, proveniente da literatura da economia do trabalho (Lazear & Rosean, 1981), é precisamente um desses sistemas depois de se ter expandido para a gestão e para outras disciplinas. Contudo, muitos dos estudos sobre estruturas de prémios que utilizam esta teoria, têm-se concentrado em prémios com dois níveis enquanto na prática as organizações utilizam estruturas de múltiplos níveis. Além disso, embora existam trabalhos anteriores que têm revelado as reações dos agentes em torneios dinâmicos, são poucos os estudos sobre essas mesmas reações em estruturas de prémios de múltiplos níveis. Foi esta contradição entre a teoria e a prática que motivou esta tese. Com base na teoria dos torneios, a tese estuda o efeito da estrutura de prémios e da política de "feedback" seguida pela organização sobre os esforços dos trabalhadores num torneio com vários sujeitos. Utilizou-se o método experimental para se compararem os esforços em quatro situações: estrutura de prémios de dois níveis e política com e sem "feedback"; estrutura de prémios de níveis múltiplos com e sem "feedback". Finda a experiência, convidaram-se 6 participantes para um grupo de discussão a fim de se obterem mais esclarecimentos sobre a prova. Em complemento estudou-se o caso de uma empresa fabril na China através de análise documental e de um questionário distribuído aos empregados. Os resultados demonstram que, num torneio com múltiplos sujeitos, os esforços são superiores quando é utilizada uma estrutura de prémios de níveis múltiplos. O mesmo acontece em caso de política de "feedback" integral ou mesmo quando não existe "feedback". Estes resultados podem contribuir para ajudar a desenvolver a teoria dos torneios no que se refere à estrutura de prémios em torneios com múltiplos sujeitos e podem também aproximar a teoria da prática ajudando os gestores na implementação de sistemas que maximizem o desempenho dos trabalhadores